Victoria

Where to for Melbourne's apartment market?

APARTMENT projects have continued their upward trend in the December quarter of 2010, according to the second edition of Oliver Hume Real Estate Group's Melbourne apartment report.

While the share of total dwellings approved remained somewhat constant for flats, units and apartments between 1 to 3 storeys, high rise apartments (four or more storeys) made up 26 per cent of total dwelling approvals in the December quarter of 2010.

The report states that approvals of flats in a building of four or more storeys have achieved a market share of 10 per cent or more in only four of the last 16 years, peaking at approximately 16 per cent some eight years ago in 2002/03 when interest rates were low and credit was easy to access.

The report also finds that there are 290 projects on the market which, when and if fully developed, will deliver around 33,600 apartments. In the December quarter, 38 projects were launched throughout metropolitan Melbourne.

The median one-bedroom apartment price decreased from $374,000 in the September quarter to $370,000, while the median two-bedroom apartment price rose from $465,000 to $545,000, with overseas investors continuing to underpin the market.

Read below for the Melbourne apartment market report for the December quarter, 2010, by Oliver Hume Real Estate Group.

THE METROPOLITAN MELBOURNE APARTMENT MARKET – December Quarter 2010

Oliver Hume Real Estate Group - Edition 2

Victorian dwelling approvals, released by the Australian Bureau of Statistics to December 2010 continue to demonstrate elevated activity in the 'flats, units and apartments' sector.

They show that in the six months to December 2010, high-rise apartments, discussed in the inaugural edition of this publication, gained a massive 26% share of total dwelling approvals.

Before then, their share since 1994/95 averaged a mere 9%.

In fact, approvals of flats in a building of four or more storeys have achieved a market share of 10% or more in only four of the last 16 years, peaking at around 16% some eight years ago in 2002/03.

At that time, when house prices were rising rapidly, interest rates were low and credit easy was to get, investors plunged into new housing, and especially into multi-unit housing sold off the plan[1].

Flats, Units and Apartments: share of total dwellings approved, Victoria (click to enlarge)

Of course a dwelling approval does not guarantee commencement; particularly in the high rise segment where development financing constraints have been well documented.

The real question is: how many dwellings will actually be built? Currently less than 50% of all metropolitan Melbourne high-rise projects have reached construction[2].

The latest Metropolitan Melbourne Apartment Digest confirms that there is no shortage of apartment projects being marketed: in total there are just over 290 projects on the market which, when and if fully developed, will deliver around 33,600 apartments.

These projects are at a pre-selling, under construction or completed (with unsold product) stage of the development cycle[3].

They represent a 12% increase on the number of projects on the market in December 2008, and a 68% increase in the number of apartments when fully developed.

The average number of apartments per project has over the same period risen by 50%, from 82 to 123.

Of the 38 projects, 18 were in inner Melbourne delivering around 3,150 apartments, fully developed. Both Melbourne and Southbank comprised 13% of all projects.

Perhaps activity levels in inner Melbourne remains one of the most salient points in regard to metropolitan Melbourne apartment market. Comprising the municipalities of Melbourne, Port Phillip, Stonnington and Yarra, inner Melbourne totaled 47% of all metropolitan Melbourne projects (up from 36% in December 2008).

Across inner Melbourne, the fully developed yield has risen significantly from around 9,200 in December 2008 to 24,100 in December 2010.

The average project yield is now 181.

As documented in the inaugural edition of this publication, overseas investors continue to underpin the market, delivering strong 'off the plan' sales in inner Melbourne. They are pre-disposed to higher density living and favour proximity to a Central Business District (CBD).

It is easy to see how the current peak in high-rise dwelling approvals has been in part driven by scale and density of inner Melbourne projects - and by the eagerness of the previous State Government to push projects through.

Analysis of planning approval data for this precinct shows that the average project value is around $39.4 million (with 40% above $80 million). Two-thirds were optimistically expecting to commence construction in the first quarter of 2011.

All – Inner Melbourne Project and Apartment Count (click to enlarge)

Among the new metropolitan Melbourne apartment projects for the December quarter, the internal area of a one-bedroom apartment remained unchanged, at 50 sqm.

In the same period, the median one-bedroom apartment price fell slightly, from $374,000 in the September quarter to $370,000, while the median two-bedroom apartment price rose from $465,000 to $545,000.

Two-bedroom apartments have increased in area to 70 sqm.

All – New Releases – Metropolitan Melbourne Apartment Area and Price (click to enlarge)

The gap between the median inner Melbourne house and 'other dwelling' has grown by around 75% since 2003 (currently a gap of $346,000, up from $197,000 in 2003).

In the middle ring, the gap has almost tripled over the same period, from $48,000 in 2003 to $140,000.

In an environment where the median apartment auction clearance rate, of 67% in early 2011 is higher than the house clearance; perhaps the price of a house in the inner or middle ring is now accepted, for many, as out of reach[5].

NOTES

[1] Over the last fifteen years more than three-quarters of all new dwellings approved in Victoria have been detached houses. Some 13% have been low-rise multi-unit dwellings: semi-detached row or terrace houses or flats in a building of one or two storeys. Fewer than 2% have been three-storey walk-up flats; and about 9% have been flats in a building of four or more storeys: so-called high-rise flats.

[2] The number of inner Melbourne projects that have commenced construction is approximately 50% or around 13,000 units. Excluding projects launched in the September and December quarters of 2010, the percentage rises to approximately 66%.

[3] In some instances, it is understood that offshore investors, particularly from south-east Asia and China have expressed interest in buying inner Melbourne projects 'yet to commence construction with strong presales' and 'finished developments with unsold product'.

[4] On a suburb basis, Carlton comprised 8% of all projects followed by Camberwell with 5%. Melbourne, Southbank and Abbotsford round out the top 5. In terms of total end yield, Southbank comprised 38% of all new projects (1,600 units) followed by Melbourne with 19% (799 units).

[5] Despite a softening in the September quarter 2010, the median inner and middle house price in Melbourne is now $875,000 and $620,000 respectively. Is the paradigm shift that owner occupier demand in the CBD fringe is being satisfied by one and two bedroom apartment projects in these areas, it appears so.

AUTHOR NOTES

Oliver Hume Real Estate Group is the marketing agent behind more than 57,000 residential products along the eastern seaboard of Australia, representing Australia's leading public and privately listed companies.

In Victoria alone, over the past 11 years Oliver Hume Real Estate Group has successfully delivered more than 200 residential projects, settling in excess of 5,000 residential products per annum.

It has offices in Melbourne, Sydney and Brisbane and is active in both land and medium density and high market segments.

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